Do Populist Governments Inevitably Crash the Economic System?

“Dollars, dollars.” Beneath the scorching heat, scores of money changers are selling US dollars along Florida Street, a bustling pedestrian strip in Buenos Aires. Referred to as arbolitos (“small trees”), their business is booming ahead of the October 26 congressional elections in a nation long used to holding the US dollar.

“The optimal moment for purchasing is currently,” says a arbolito, declining to give her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso once the voting concludes. The president has placed a limit on the peso to control triple-digit price increases and currently it remains overvalued and foreign reserves are exhausted, causing Argentina’s economy sluggish as buyers turn to cheap imports.

Ideal Conditions

The nation is a very special case. Argentina has frequently been racked by debt defaults and financial turmoil and its voters have been receptive over the years to left-leaning populist movements, in the form of the powerful Peronist movement, and currently the president’s conservative populism.

Milei is a textbook populist: charismatic, iconoclastic, promising forceful policies to reclaim command of economic management from the establishment for the benefit of the people.

These defining traits are also seen in his ally to the north, and by the UK politician, who styles himself as a pint-swilling champion of the common man despite being a public school-educated former stockbroker.

Up until lately, Milei’s approach – including extensive privatisations and deep budget reductions – had earned praise from the IMF for helping to control price rises under control. This plan has something in common with the policies of Milei’s idol Margaret Thatcher, who also saw rising prices as a dragon to be slain, no matter the cost.

But financial markets began losing confidence in Milei’s radical project lately following a shaky result in local polls and multiple graft allegations. Only large-scale financial intervention from abroad has averted what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, Boris Johnson, swept away doubts about economic detail with a bullish determination to implement public demand in the face of elite opposition.

Farage has so far committed few policies to paper except for proposals for mass deportations, which he subsequently seemed to adjust on the hoof. He wants to curb the central bank, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions as a central element of the populist package.

His fiscal plans seem unsettled: wary of facing criticism for proposing reckless spending, he lately abandoned a pledge to make significant tax cuts. His second-in-command, the party chairman, said they would focus instead on reductions in government expenditure.

Labour hopes this position will allow it to depict the populist as intending to bring back fiscal tightening – a point Rachel Reeves has made repeatedly, comparing it unfavorably to her strategy of boosting government spending.

An economics professor says there exist inconsistencies within the populist platform, such as it is. “Reform are bankrolled by very wealthy people calling for lower taxes and deregulation, but also emphasizing the grievances of ordinary workers and the loss of industrial jobs,” he says. “There’s a tension there between rich backers who want Thatcherism on steroids, and this narrative of restoring UK employment and industrial revival.”

Holding on to Power

Realistically, research indicates neither left nor right populists often perform poorly when confronting real-world challenges (although every populist leader claims to offer distinct solutions).

A recent paper from a leading journal examined the outcomes of dozens of populist leaders, from 1900 to 2020. It found that on average, after 15 years, gross domestic product per head tends to be a tenth less in countries run by populist rulers than in comparable countries under conventional leadership.

“Economic disintegration, decreasing macroeconomic stability and the decay of governance typically go hand in hand under populist governments,” argue the researchers.

A further interesting result of the research, however, is that despite their economic costs, these leaders are often effective at retaining office, lasting on average eight years, versus four for mainstream politicians.

In other words, it is not clear that even when their plans crash, such leaders face immediate consequences in elections. Similar to pledges made to regain sovereignty, their attraction reaches beyond mundane economics.

But back in Buenos Aires, regardless of if the government’s agenda collapses or is kept on life support through foreign assistance, the Argentine people have already paid significant costs.